U.S. Labor Dept Joins Fight Over Tribune Bankruptcy

WILMINGTON, Del. (Reuters) – Tribune Co’s reorganization plan wrongly tries to shut down a lawsuit against Sam Zell, who took the company into bankruptcy, and block potential claims by the government, the U.S. Department of Labor said in a court filing.

Zell led an $8.2 billion leveraged takeover of the owner of the Chicago Tribune, Los Angeles Times and cable television station WGN in 2007. The company filed for bankruptcy in 2008.

The Labor Department is investigating Tribune for federal violations for the way Zell used the company’s employee stock ownership plan, or ESOP, to finance the leveraged buyout, according to bankruptcy court filing on Thursday.

If the Labor Department determines the leveraged buyout’s reliance on the ESOP was a prohibited transaction, the government could press potentially valuable claims against those who had a role in that deal, including Zell.

An Illinois court hearing a lawsuit against Zell and others has already essentially determined the transaction was prohibited, according to the Labor Department filing.

However, Tribune has proposed releasing Zell and others from liability relating to the potential ESOP violation, even in the Illinois lawsuit that is under way, according to the Labor Department.

ESOP participants will vote on the company’s plan, and by approving it they would be agreeing to release Zell.

The department was objecting to the company’s disclosure statement that must be mailed to creditors who will vote on the plan of reorganization. Objections to the disclosure statement are often test runs for strategies to fight the plan itself.

“The proposed disclosure statement fails to fully and clearly state that it wrongfully seeks to preclude the ESOP and its participants from obtaining any relief on their apparently strong claims,” the filing said.

The company said in a statement the plan was fair to all parties and creditors.

“It was crafted with the intention of avoiding expensive litigation that could further delay our emergence from bankruptcy,” the statement said. “We remain confident in our ability to get the plan approved by our creditors and confirmed by the bankruptcy court.”

Tribune’s proposed plan values the company at less than the claims of senior lenders, leaving no recovery for bondholders.

However, the company reached a settlement and proposed giving about 7 percent of the company’s value to senior bondholders to settle their claims that the leveraged buyout and bankruptcy wiped out their investment.

Other creditors also objected the to disclosure statement including a group of lenders holding $2.3 billion of senior claims and a group holding bridge loan claims.

Delaware’s Bankruptcy Court will consider the disclosure statement at a hearing on Tuesday.

The case is In re: Tribune Co et al, U.S. Bankruptcy Court, District of Delaware, No. 08-13141. (Reporting by Tom Hals, editing by Matthew Lewis)